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Hit by a triple whammy of a recent recession, accounting scandals, and the impact of September 11, financial services firms are leading an outsourcing surge, a recent study shows.

Technology research firm Dataquest Inc., a unit of Gartner, Inc. , estimates that worldwide financial services business process outsourcing (BPO) revenue will total $41.3 billion this year. That represents a 9.3 percent increase over 2001.

In the banking sector, for example, credit card payment processing ranks among the most prevalent areas being offloaded to outsourcing firms, Dataquest said.

In addition, services that were once considered more sacrosanct in banks' customer relationship arena, such as cash management, mortgage origination and lending, are now driving the renewed interest.

Business process outsourcing already has a long and honorable heritage in financial services' efforts to control costs, said Susan Cournoyer, senior analyst for Gartner Dataquest's IT services group.

"But what we're seeing is an explosion of interest (in part) because of the recession, Internet platforms for new services, and emerging new business models" among vendors, she said.

And although cost containment ranks high among the key drivers (given the downturn in financial firms' fortunes this year), an intensely competitive environment for keeping and adding new customers is behind the boost too. Anything that can be offloaded in order to help the financial firm focus on customer retention is considered on the table these days.

In the securities industry, outsourced business processes include trade support and settlement, custody and accounting and mutual fund account servicing.

Insurance providers are also increasingly part of the outsourcing drive with claims processing and policy administration, the study said. In general, firms continue offloading payroll, benefits administration and real estate management.

Plus, Cournoyer said new IT entrants offering increasingly sophisticated products and services to financial services firms are stirring up the competitive cauldron among established outsourcing players such as EDS and Accenture.

In addition to credit card payment processing, other hot areas of interest among IT vendors include traditional and new forms of electronic payments processing, she said. Human resource applications and corporate administration services are also considered key drivers.

Cournoyer noted that outsourced cash management services have brought some financial services institutions to something of a crossroads, where they need to strike a balance between offering a core customer service and controlling costs.

"Banks are looking for IT providers to partner with in order to develop a cash management offering" that can be both personalized and outsourced for cost savings.

The surge in interest is also notable, Gartner Dataquest said, because its research has shown that financial services firms have historically considered outsourcing services too costly and, too often, disappointing in quality.

Cournoyer said fear of losing control and even cultural opposition to outsourcing were important obstacles too, particularly in the insurance industry. That said, her advice to IT vendors looking to benefit from the surging interest is to first make sure the potential client understands that an outsourcing deal is not always a quick fix.

"Building and delivering on a value proposition that combines improved service levels with strong cost management is critical to ensure the ongoing viability of (business processes outsourcing) in the finance sector," she said.

"Overall, it's tempting to think that cost containment is the only driver. But two things have emerged from the research as critical: improving service levels and migrating (financial firms' systems) to new technology," she said.
Vendors not only need to meet the firms' new cost criteria, but they have to show the firm they have staying power, given the multiyear nature of outsourcing contracts, added Rebecca Scholl, a senior analyst for Gartner Dataquest's IT Services group.

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